The Central Finance Commission (CFC) and the State Finance Commissions (SFCs) are two constitutional bodies in India that are responsible for recommending the distribution of financial resources between different levels of government. While the CFC is responsible for recommending the distribution of resources between the central government and the state governments, the SFCs are responsible for recommending the distribution of resources between the state governments and local bodies.
Here are some key differences between the CFC and SFCs:
- Scope of Recommendations: The CFC makes recommendations on the distribution of resources between the central government and the state governments, while the SFCs make recommendations on the distribution of resources between the state governments and local bodies.
- Frequency: The CFC is constituted every five years, while the SFCs are constituted every five years in each state.
- Basis of Recommendations: The CFC’s recommendations are based on factors such as population, area, revenue-raising capacity, expenditure needs, and debt burden. The SFCs’ recommendations are based on factors such as the level of decentralization, the financial position of the local bodies, and the expenditure requirements of the local bodies.
- Binding Nature of Recommendations: The recommendations of the CFC are binding on the central government and the state governments, while the recommendations of the SFCs are binding on the state governments and the local bodies.
- Purpose of Recommendations: The recommendations of the CFC are intended to ensure that the financial resources of the country are distributed fairly and efficiently between the central government and the state governments. The recommendations of the SFCs are intended to ensure that the financial resources of the state are distributed fairly and efficiently between the state governments and the local bodies.
Central Finance Commission and State Finance Commissions Comparison Chart
| S. No | Characteristics | CFC | SFC | Comments |
| 1. | Composition | President of India appoints one Chairperson, other members, and secretary in pursuance of article 280 | Governors of the respective state appoints the Chairperson, other members and secretary in pursuance of article 243 | While composition of CFC has well established conventions, this in not the case in case of many SFCs |
| 2 | Tenure | As per the notification- normally it is 2 years | As per the notification- normally it is 2 years | Adhocism at SFC level |
| 3. | Terms of Reference (This is issued in continuation of the order with reference to the appointment of the commission) | 1. Nature and Functions of the Commission 2. Time frame for the different Kinds of activities 3. Area of recommendations shall be made | 1. Nature and Functions of the Commission 2. Time frame for the different Kinds of activities 3. Area of Recommendations to be made | Unlike NFC, SFCs are required to first generate data and then analyze it, which is beyond the capacity of SFCs in their present form |
| S. No | Characteristics | CFC | SFC | Comments |
| 4 | Major Areas of Assessment | 1. Assess the existing state of distribution between the Union and the States 2. Assess the principle that governs the grant-in-aid. 3. Measures taken to augment the Consolidated Fund and also to supplement the resources of the Panchayats and Municipalities. 4. Review the state of finance of the Union. 5. Review the present arrangements with regard to disaster management with reference to national calamity relief fund. 6. Review of shares between the state and the union on profit from non tax income. 7. Assessment of the debts of the states. | 1. Review the financial status of the rural and urban local bodies the state. 2. Assess the distribution of finance between the states and the local bodies. 3. Review the determination of taxes, tolls and fees assigned to the appropriate local bodies. 4. Review the grant-in-aid to the local bodies from the state. 5. Review the existing level of devolution and other resource transfer to the local bodies from the state and central government. 6. Review the status of implementation of the recommendations of the earlier finance commission. 7. Review the system of accountability of the local bodies in terms of resource utilization. | SFCs terms are clearly non specific; hardly any previous norms are available. Hence they may have to grapple in the dark. |
In summary, while both the CFC and the SFCs are important institutions for promoting fiscal federalism and ensuring that financial resources are allocated in a fair and equitable manner, they differ in terms of their scope, frequency, basis of recommendations, binding nature of recommendations, and purpose of recommendations.
State Finance Commission (SFC)
Central Finance Commission (CFC)
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